Will Stanton is committed at Westin Hills Psychiatric Home along with several other kids from Elm Street who have been having nightmares about Freddy Krueger, the dream stalker who was vanquished by Nancy Thompson 6 years ago.

Nancy comes to visit Will and her friends at the hospital. Nancy is the only person who believes their story, as she was one of a few people who managed to defeat Freddy in the past.

Apparently, Will tried to end his life, but he survived and was left disabled as a result. One night, Will is awakened by Joey Crusel, who witnesses fellow inmate Philip Anderson leaping to his death. It is actually not a suicide. It was their nemesis Freddy Krueger, controlling Philip as a puppet and making Philip's death seem like his sleepwalking habits had caused the fatal fall.

Will and the other inmates become the Dream Warriors and they attempt to save their comatose friend Joey by coming into the same dream. Joey was captured by Freddy after they fell asleep and he wandered off. Joey was left suspended above a fire pit, after he was seduced by Freddy, disguished as the nurse Joey had a crush on.

Eventually, the Dream Warriors save Joey from a horrible fate. However, Will soon faces Freddy, during the group dream, Will finds himself in a narrow hallway and is attacked by a wheelchair with spikes on it. It injures his legs, but before it can rebound, Will blows it up using his magic powers to stop the wheelchair dead in its track. Unfortunately Freddy appears. Will blasts him with sorcery, and, though it seems to harm him at first, Freddy shakes it off and grabs Will by the throat. After sarcastically apologizing with the remark of, "Sorry, kid. I don't believe in fairy tales," Freddy fatally stabs Will in the chest.

After killing him, Krueger absorbed his soul. It was released in the next film when Krueger lost a fight against Alice Johnson.